BURMA'S BANKS: GOVERNMENT CUTS LIFELINE

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000299

SIPDIS

STATE FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 03/04/2013
TAGS: EFIN PREL ECON BM
SUBJECT: BURMA'S BANKS: GOVERNMENT CUTS LIFELINE

REF: RANGOON 271 AND PREVIOUS

Classified By: DCM Ron McMullen For Reasons 1.5 (B,D)


1. (C) Summary: The regime has pulled the rug out from under
the private banks, denying them any Central Bank credit.
Though some reconfiguration of the banking system seems
inevitable, the GOB has been mum so far on its exact
intentions. The longer the delay in action, the longer the
country's economic paralysis will extend, and the bigger the
mess the regime will inherit in the mid- to long- term. End
summary.

GOB's Sleight of Hand


2. (C) Accounts early last week of Central Bank loans to
troubled private banks turned out to be totally false. We
reported that the Central Bank had extended loans of up to 53
billion kyat (about $50 million) to the six most desperate
banks in exchange for collateral (including the personal
residences of their Chairmen). In reality, the Finance
Ministry had been leading the banks on with promises of loans
if the collateral was right. After a week of berating bank
owners for incompetence and demanding in-depth assessments
the banks' various real properties, the Finance Ministry told
assembled bankers on March 3rd that there would be no loans
or other new money for anybody.

The Run Continues


3. (C) The banks are on their own. Without GOB help, the
short-term survival of the largest, and hardest hit, private
banks (AWB and Yoma Bank) will depend on their ability to
call in outstanding loans, bring in new (or return) deposits,
and cash in on existing assets. So far these efforts have
largely failed. According to economic sources, most
borrowers, facing a cash crunch of their own, have refused to
repay their loans, and some have even stopped making their
regular interest payments. Potential investors, even if they
have the cash, are reluctant to buy up AWB's and Yoma's
distressed assets for fear of coming under investigation for
ties to "criminal elements" in the banking sector.


4. (C) With things as they are now, the situation could
rapidly go critical. Despite increasingly smaller weekly
withdrawal caps (now set at 100,000 kyat ($100) per week),
roughly 230 billion kyat has fled the banks during the last
two weeks. Due to the tightening restrictions, total
withdrawals for this week will slow to at most 18 billion
kyat (down from 30 billion last week). As the slow bleed
continues, however, there is growing risk that some of the
banks will start to run out of cash within the next week or
so. These failures could be delayed for several weeks,
though, even without GOB help, if banks are more successful
than they have been in cobbling together some new cash.

Playing God with the Banks


5. (C) The decision by the GOB, made at the highest levels,
to withhold Central Bank credit lines clarifies earlier
suspicions that the SPDC rulers have no love for the private
banking system, and would like to see some or all of the
existing private banks dead. To this end, the GOB will
apparently conduct thorough reviews of each banks' loan
portfolio and operations. Though the Central Bank's twenty
audit teams have yet to swing into action, the SPDC has
allegedly assigned a mid-level military officer as a Cadre
for each of the teams. This inclusion of military officers
is a sign that the final analyses of the banks may be based
as much on political agendas than financial facts.


6. (C) Assuming the regime has decided to review the banks'
operations, the timing of this next move is uncertain. One
economist guessed that the regime would wait until the first
major bank runs out of cash before sending in the
military-led audit teams. In any event, the financial
investigations will likely wait until Military Intelligence
completes its own inquiries into allegations of embezzlement
and illegal foreign exchange trading that hang over the heads
of some top bankers.

7. (C) It is equally hard to predict who the GOB will allow
to remain standing when the dust clears. If the auditors do
their job properly, a bank's survival will depend primarily
on the quality of its loan portfolio (now a big question
mark) and the cleanliness of its daily operations. However,
the X-factor is the weight the GOB will give to politics and
cronyism. For example, while AWB (as the epicenter of the
banking crisis) is a logical choice for destruction or
dismantling, the bank has outstanding several large loans
given to major construction firms for projects in which the
GOB is involved. KBZ Bank is a logical survivor, as the
Chairman is close friends with Vice Senior General Maung Aye.
However, KBZ's lending practices are reportedly among the
least sound of any of the privates.


8. (C) One theme that we've been hearing around town is
merger. Many are predicting that the regime will force the
merger of many of the smaller private banks so that there is
more competition and a better spread of deposits (before the
crisis, AWB and Yoma together held about 65-70 percent of
total deposits). However, we have no solid evidence that the
GOB is actually planning to do this, or, if so, when and how
they plan to do it.

The Future is Hazy


9. (C) The GOB's decision not to make clear its intentions
has left the banking and business community in a bitter mood.
No one debates the wisdom of doing an honest and thorough
review of the banks and subsequently disposing appropriately
of bad banks, bad loans, and bad bankers. If done quickly
and properly, this could be a good thing for the economy.
However, the longer the government waits to take charge, the
more expensive any final solution will be. In addition, the
longer the economic paralysis stemming from the banking
crisis continues, the greater the damage to the already weak
economy, and the increasing chance for some degree of social
unrest.
Martinez